3. BRRRR Strategy and Loan Terms
3. BRRRR Strategy and Loan Terms
This is the third in a multi-post series on financing your rental investment properties using the BRRRR strategy.
You own a few rental properties free and clear, and you are thinking about refinancing them to re-invest capital into new projects.
Your first question would be what is my plan for this property?
1. Is this a short-term hold for a few years to build up equity and sell it retail to an owner occupant or turnkey to another investor?
2. Perhaps it is a long-term hold to generate passive income for your retirement to that beachfront property of yours in the Caribbean?
3. Are you motivated more by refinancing because you may never see the ARV of your property this high again? You want to keep the property, but you also want to cash out equity.
4. Are you more motivated by leveraging your cash out into other investments or maintaining a higher ROI after refi?
There are basically three loan terms that are available to most BRRRR investors.
The 5/1 or 10/1 ARM mortgage both come with a fixed rate. These are loans for a shorter period followed by a rate that adjusts on an annual basis. An example may be a 60-month interest only at the prime rate + 1% with a 20 yr. amortization. The current prime rate today is 3.25% + 1% = 4.25%. You are only paying the interest on this loan, not principal. When the rate adjusts after the loan term, your rate will be the current prime rate + 1%. You are now paying the principal and interest. If rate stay the same or decreases, you benefit. If the rate increases, then your cash flow may be significantly affected. The benefit of the ARM loans is a lower interest rate and payment. It is best for investors looking to refi or sell the property by end of the loan term. If you want to keep the property long term, the ARM’s may not be the best loan for you.
Who knows what the rates and value of your property will be in 5 or 10 years? Is it worth the risk for a slightly lower interest rate? Remember the crash of 2008? Many investors were in short term ARM loans and upon adjusting, decimated their cash flow. Many of the mortgages were underwater, meaning the property value was less than the mortgage amount owed. Most had no choice but to let the banks foreclose.
The 30-year loan provides the greatest flexibility. You are not worried about short- or long-term volatility in the market. No worries about extending or refinancing incurring points and additional costs after a short-term period (unless you plan on refinancing to pull out equity). With a solid low interest rate and 30-year amortization, your property will cash flow nicely as you build up your passive income empire.
Whichever one you choose; we are here to assist you through the process.
To view previous post for this BRRRR series, follow us at www.facebook.com/REITrader
Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com
Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC. and a licensed real estate broker since 2011 with Real Equity, Inc. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,700 projects.
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